Greece default could be best thing for the markets

Sep 25, 2011

G20 nations are reportedly discussing an ‘orderly default’ which would keep Athens in the eurozone

What's happened? G20 nations have reportedly hammered out a €2 trillion (£1.75tr) deal to enable Greece to default on some of its debts while remaining a member of the euro.

The Sunday Telegraph reports that the plan would simultaneously recapitalise banks exposed to Greek debt and pump money into the European Financial Stability Fund which was set up to bail out struggling eurozone governments. It is hoped the EFSF will be so big that it will be able to protect the troubled economies of Spain and Italy from the dreaded Greek contagion.

What does it mean? In a sign of how sensitive the negotiations are - particularly in Germany, where the population is dead set against spending any more money towards helping out Greece - Chancellor George Osborne denied the reports, saying: "No one has put forward a plan for a Greek default."

But if the Sunday papers are to be believed – virtually all of them carry the story of the rescue plan – then Osborne is the only man in the world who doesn't know about it.

And a default would be no bad thing, according to many observers. If it is orderly and well-planned, "it could actually help stabilise markets by bringing the uncertainty to an end", writes Simon Watkins in the Mail on Sunday. He quotes a research note from Citigroup, which says that there is only a five per cent chance of Greece avoiding a default.

How orderly the default will be, says Citigroup, depends "on the size and scope of the European Financial Stability Fund, European Central Bank action and availability of money to recapitalise banks that are potentially made insolvent by default".

Time magazine's Michael Schuman gives a number of reasons why a Greek default would be positive. He says it would allow the bailout money to be used to support Italy and Spain, whose debt crises are the "real threat to the future of the euro".

Schuman points out that a Greek default would not be as disastrous for global markets as the event it is frequently compared to, the collapse of Lehman Brothers in 2008. This is because "there would be no shock value from a Greek default, as there was with Lehman".

As for the Greek government, it appears to welcome talk of a default, with the country's finance minister Evangelos Venizelos suggesting the "best option" for Athens would be a 50 per cent writedown for Greek bond holders.

What next? G20 leaders have set themselves a six-week deadline to finalise their plans for the orderly default, which will reportedly be announced at the G20 summit in Cannes on November 4.

More immediately, the behaviour of stock markets when they open tomorrow will give some indication of what investors think of the 'orderly default' plan.

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